Wednesday, April 8, 2009

I watched Aaron Task's interview with Richard Russell this morning. Russell characterizes the current rally as a bear market rally. He also believes that treasuries are in a bubble, and I certainly agree with him on that point. Russell further opined that this bear market will last longer and go deeper than most people believe, and individual investors need to stay on the sidelines in cash and a little gold.

I mentioned yesterday that I sold TBT, one of the hedges for my long corporate bond position as it gained close to 10 dollars in 3 months or so. I noted that my stock hedges were sold for profits in 2008, including SDS and TWM. I discussed in prior posts that I was critical of my desire to profit on hedges, whose main purpose was insurance, and apparently I did not take that criticism to heart. BARRON'S ROUNDTABLE/Hedging Successes and Failures in 2008

In fact, just for my benefit, I am going to quote a sentence from an earlier post that I wrote:

"I simply have to convince myself that it would even be okay to lose on the hedge if I was concerned enough to buy in the first place." Maybe I need to put that on a post it note and place it somewhere around my computer screen.

Sometimes, it is possible to know something cerebrally but that does not prevent one from doing the exact opposite. Yes, I made money on my stock hedges in 2008 but none of them were in place when I needed them the most, which was in the three month period starting after the Lehman bankruptcy.

I have decided to increase my asset allocation to floaters (floating rate securities) with minimum guaranteed rates. I already have a separate asset class for bonds or bond like investments that provide some inflation protection, which includes the floaters and the ETFs TIP and WIP. I am going to bring this class up to about 10% of my total portfolio. A float provision is one way to provide some inflation protection to a bond since the interest rate floats up based on some percentage over a short term benchmark rate like Treasury bills or LIBOR. Those rates should increase as inflation becomes a problem. I am going to wait until the Fed reverses its quantitative easing to buy more floaters with no minimum guaranteed rate. I may try to trade one that I have already bought, and then try to purchase it back at a lower price later on. For the most part, the main appeal for buying floaters now without a guarantee, like GJT and GJR, has been the huge discount to par value which will make them even more appealing to me when short rates start to rise. Those decisions will look smart when T Bill rates are at 5%. I will also try to add floating rate securities that are further up the seniority ladder than AEB and METPRA, both of which are equity preferred issues (senior only to common and below all bonds) and the Met Life floater is not even cumulative. I am not going to buy more floaters that I classify as non-cumulative equity preferred stocks. I am open to adding to AEB below $5.

I have been busy looking for floaters with minimum guarantees that are tied to bonds, as in the synthetic floaters, or the bond itself is a floater. The synthetic floaters are Wall Street creations, engineered out of a swap agreement, and tied to a fixed rate coupon bond. I have already bought several of these and will buy some more. These can be purchased on the stock exchange just like a common stock. Other floaters will have to bought by placing orders in the bond market.

I may be one of the few people buying these instruments judging from the volume. On a couple of occasions, I have accounted for the entire day's volume which would cause most to reassess what they are doing, or at least question it more. My only defense is that my professional training is to prepare for potential outcomes and alternative scenarios before they actually happen, often in great detail with elaborate ifs, ands and buts. So, I will sell stocks in a bull market when the consensus is no danger ahead, and I will start to provide protection against inflation when the consensus is worried about deflation. I was buying the TIP last quarter when the inflation protection of that security was being priced at close to zero due to hyper deflation concerns. I know about the deflation concerns now, but that is not what I am worried about now. I am worried about inflation when the economy starts to grow again, or stagflation in the event the Fed fails in what it is trying to do now. Some earlier posts where I discuss inflation and deflation scenarios are as follows:

Before leaving this morning, I placed a few limit orders to buy some floaters. One was filled as a motivated seller apparently showed up and hit my bid at $17.5 and several below my bid. It is now trading closer to $17. Someone trying to sell or buy a thousand shares of these thinly traded issues can skew the market down or up respectively. The one bought this morning was a TC, GJP, containing a senior bond issue from Dominion Resources (D), a large electric utility serving primarily in Virginia. GJP is a synthetic floater created by a swap agreement and tied to fixed rate coupon note maturing in 2035. The float provision has a minimum of 3% and a maximum of 8%. Interest payments are made monthly. The float provision is excellent at 1.15% over the 3 month treasury bill. Fitch rates the underlying senior note at BBB+. Fitch Corporate

As with the other floaters recently purchased tied to a short term rate and containing a minimum rate, the guarantee is the currently applicable rate since it is higher than the the interest rate provided under the float provision. At my price the current yield is around 4.28%, not very enticing but better than treasuries or money market rates. At a 3% T BILL rate, the yield rises to 5.9% which increases to about 6.21% at a T bill rate of 3.2% which is the number that I have been using as a reasonable guess as to the average rate over a 25 year period. At the maximum rate, which is hit when the T Bill calculation hits 6.85%, the yield becomes 11.42%. So it is going to provide a significantly better yield than the 3 month T bill with more risk which I view as acceptable based on my current opinion on Dominion (D).

So, I view this is one as having less potential at my cost than the others when short rates start to rise. I bought it today since it has a good float provision, the underlying security is a senior note from a seasoned and stable company, the guaranteed yield at my cost provides a decent return in the current rate environment, and it provides me some diversity in my floater portfolio which is growing.

Another $750 could be generated by holding the shares purchased today until maturity on 6/15/2035, call it 26 years. Amortizing the spread this would generate an additional annualized return of $28.85 per year or 1.648% based on my cost. And that return is small compared to some of the others, another negative feature of this purchase today.

I will consider buying another 100 on a slide to around 1/2 of par value.

I also sold the 50 GPX that I bought earlier in the year at $4 at a loss of a couple of dollars figuring that even at my small investment it was no longer worth the risk associated with a GM bankruptcy which is looking increasingly likely to me.

DISCLAIMER:

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like InvestmentsNOT A RESEARCH SERVICE/Add of PWE Last WeekThese posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.